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REITs go shopping for other REITs

This Christmas season mall owners are doing their own last-minute shopping — seeking more mergers and property acquisitions in a new wave of consolidation that, analysts and executives predict, will continue in 2003.

The biggest potential deal would be for Taubman Centers, which in mid-November received an unsolicited bid from Simon Properties. CEO Robert Taubman had previously refused a friendly merger proposal. While both the Taubman family and its board rejected the $17.50-per-share offer, analysts and rivals say that the bid will put Taubman in play, attracting other potential buyers and higher offers.

A contest for Taubman might only be the starting gun for the new dealmaking season, industry watchers say. A new merger wave is likely next year because of the expected slowdown in retail growth (see cover story beginning on page 18). In this environment, says John Bucksbaum, CEO of General Growth Properties, mergers and acquisitions will be the primary growth vehicles for REITs.

“When we went public in 1993, it was with the expectation that there is going to be very limited development going forward, but that there would be a great many acquisition opportunities,” Bucksbaum says. “We expected to see a consolidation and the ability to buy assets, and that's exactly what's happened over the last 10 years, because most markets generally have what they need in terms of square footage.” The retail malaise is likely to accelerate the trend.

Bucksbaum declined to comment on Simon's bid for Taubman, but analysts say that General Growth could be a possible bidder. The REIT has been an active buyer in 2002, snapping up JP Realty and properties from the Rodamco portfolio. Other potential suitors for Taubman's 15.8 million-sq.-ft. portfolio include The Rouse Co. and Westfield.

Wall Street seems to think a Taubman sale is now inevitable and could come within two or three months, says Deutsche Bank analyst Louis Taylor. The Simon bid for $1.48 billion in cash and the assumption of $2.4 billion debt say Robert Taubman and his brother William, who control 36% of voting stock, would not be in the best interest of the company. News of the bid drove up Taubman shares, while Simon's debt was downgraded, on the assumption that if it pursues a higher bid — or any bid at all — it will wind up straining its resources.

As a publicly held company, Taubman can't hold out forever in the face of higher bids. “In the era of heightened scrutiny on corporate governance, the board will eventually accept an enhanced offer from Simon or other suitors,” says Jonathan Litt, an analyst with Salomon Smith Barney, which provides financial services to Simon.

The Simon bid for Taubman came two weeks after Pan Pacific announced plans to purchase Center Trust, a deal that will make Pan Pacific the largest West Coast public neighborhood shopping center REIT. If the $600 million stock-swap transaction is completed, Pan Pacific would gain 5.2 million sq. ft., boosting its portfolio to 19.4 million sq. ft. If Pan Pacific shareholders approve the deal, which is expected in the first quarter 2003, Center Trust stockholders will receive 0.218 shares of Pan Pacific per Center Trust share.

The result of the dealmaking will be a stronger industry, predicts Michael Errichetti, managing director at JP Morgan Securities Inc. “After the music stops, the REITs that are left will be bigger and stronger,” he says. “Stay tuned, the upcoming mergers will not just be public/public, but private/private as well.”

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